RBI Policy comment by Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC
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Below the Quote on RBI Policy comment by Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC
As broadly expected, the RBI maintained status quo on rates and maintained the policy stance as ‘withdrawal of accommodation’. The policy tone was very well balanced as the RBI showed caution on impacts of recurring food price shocks while also acknowledged the persistent disinflation in the non-food items. It highlighted the resilience of the Indian economy and raised the GDP growth target from 6.5% to 7% in FY24. But, also guided to remain watchful of the worsening global macro environment.
High liquidity surplus post the demonetisation of Rs. 2000 currency notes had been an area of concern for the RBI in the last two policy meetings. This time, the RBI seemed more comfortable with the liquidity condition. Given the historical trend, demand for cash increases between October to May period. Liquidity condition may remain in deficit for most part of next few months. Thus, OMO sale seems unlikely for now.
Given the surprise hawkish commentaries in the previous two policy reviews, the bond market was on its toes going into this policy. So, no negative surprise in itself is comforting for the bond market. We expect the RBI to remain on hold for an extended period though it might change the policy stance to neutral by early next year.
In near term crude oil prices and global yields will continue to drive the bond market. While there is a strong case for bond yields to go down next year aided by falling inflation and favourable demand supply balance. Lower commodity prices and potential turn in the global monetary policy cycle should also be supportive for the bond markets in 2024.
Long term bonds tend to perform better during falling interest rate environment. Currently dynamic bond funds are well positioned to benefit from potential fall in inflation over the next 1-2 years. Investors with 2-3 years holding period can consider dynamic bond funds for their fixed income allocation. Investors with shorter holding period and low risk appetite should stick with liquid funds.
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